Putting It All Together…

Some simple themes today…

Population growth, economic growth, and resultant energy consumption are inexorably slowing. The Federal Reserve knows it can not stop this and is simply slowing the inevitable with interest rate cuts to incent greater consumption via skyrocketing credit/debt (particularly government debt….debt that is undertaken with no intent of ever repaying it and is really just pure monetization).

The chart below highlights that employment among 25-54yr/olds (the foundation of US consumption) ceased growing in ’00. Once employment among this group ceased growing, total US energy consumption also ceased growing, and accelerating debt was substituted to maintain growth thanks to nearly 40yrs of interest rate cuts.

The impact of the declining rates and rising debt can be seen in the Wilshire 5000 (chart below). The Wilshire represents all publicly traded US equities radically moving upward with surging US federal debt but inverse to US total energy consumption, jobs creation, and economic activity since ’00.

The driver of the Fed’s federal funds rate was and continues to be the rate of population growth and the growing demand this population growth represents. The adult population growth rate peaked in ’79 and the federal funds rate peaked in ’80…rates plus population growth have been decelerating/declining together since.

The chart below showing the 0-64yr/old population growth vs. 65+yr/old growth. The demographic and population situation only continues to get worse. In fact, it’s unlikely the 0-64yr/old population growth will hit the already low estimates from 2017–>2030 due to the ongoing decline in birth rates and slowing immigration.

What about employment? Chart below shows total full time jobs growth has slowed to a trickle (net basis from peak to peak) and total energy consumption growth likewise decelerating, peaking in ’05, and now declining. Federal funds rate moving inversely, all the way to zero. Finally, Public US Federal debt (w/out Intra-governmental holdings) skyrocketing.

All right, perhaps a different way of looking at this is net new full time jobs per period vs. new houses and new vehicles (generally hard to be a home owner without a full time job…cars, well apparently it’s a far lower standard).

1971-85 –> 1.4 net new jobs per new home and/or new car

1986-00 –> 1.5 net new jobs per new home, 1.3 per new car

2001-16 –> 0.7 net new jobs per new home, 0.5 per new car

Same variables below as above but breaking them down into two even durations over the most recent period…those who thought ’00–>’08 was a bubble, perhaps you need to recalibrate your bubble meter for what is presently happening.

1999-07 –> 1 new job per new home, 1 per new car

2008-16 –> 0.5 new job per new home, 0.2 per new car

US Core Population

I have made the case previously that the deceleration of the core (25-54yr/old) US population was the cause of the ’08 housing collapse and will reiterate this here. First, to understand the importance of this segment of the population, the chart below shows the near 1:1 correlation of total US energy consumption to the size and employment of this group.

For the charts below, I’ve added the population growth among the core population alongside the same variables as above. Unfortunately, the data set for 25-54yr/old full time employees is fairly short, only going back to 2000 (btw- at year end 2016, there were essentially the same number of 25-54yr/old full time employees as there were in 2000 and over a million fewer than the peak in 2007). Anyway, I’m using the far lower standard of employment (containing both full and part time workers) to see the longer term changes in the 25-54yr/old segment. It’s actually god-awful, economically speaking.

1971-85 –> 1.5 new jobs per new home and/or new car

1986-00 –> 1.5 new jobs per new home, 1.4 per new car

2001-16 –> 0.0 new jobs per new home, 0.0 per new car

1999-07 –> 0.4 new jobs per new home, 0.4 per new car

2008-16 –> <-0> new jobs per new home, <-0> per new car

Back to my point that the slowing population growth and slowing employment among the core was the fuse that ignited the NINJA fueled subprime housing crisis…it’s pretty plain to see from 2000 onward, the system was still building homes but they’d run out of new people to sell them to…so they collapsed the standards, did away with down payments, did away with credit worthiness, etc. Finally, as you probably know, the subprime affair didn’t turn out too well. Luckily, the ever wise Federal Reserve had another plan to avoid a free market collapse in prices…crush the bond market (yields to essentially zero) to flush out all those nearing and in retirement and direct their trillions into rental real estate. So retirees and foreigners (particularly Chinese, looking for a safe haven for all their newly minted trillions outside of China) saved the day for American real estate.

But this plan is even worse than the last, as demographics and population growth are only getting worse. As this bubble blows (and it’s high time as rents as a % of renters incomes are completely ludicrous and at unsustainable levels in nearly all bubble epicenters) retirees and investors are about to learn about the downside of being a landlord. Property prices and rents are both set to decline, likely wiping out decades of savings (equity) and rental income in one fell sweep. Short of the government directly nationalizing swaths of the housing market, financial and economic convulsions are dead ahead as housing prices collapse across America (and the RE collapse across rural America is likely to be total and complete while the urban bubble epicenters may rise once more…but more on that another day). So many hard working, generally good people who tried to play by the rules are set to lose so much. I only hope I’m terribly wrong and some better outcome awaits us…but I don’t think so.

This article was US-centric…but the same dynamics are at work the world over. Some more globally focused articles…HERE. Or HERE. Or HERE.

the funny thing is that when it collapses none of us will be able to comment

onlooker on Tue, 28th Feb 2017 3:57 pm

Yep, we are looking at asset depreciation on an epic scale due to so much monetization and resulting asset appreciation. Well as the realization dawns that the economic fundamentals are catastrophic, the economic collapse will begin in earnest

makati1 on Tue, 28th Feb 2017 7:19 pm

George, yes, a bummer that. But most don’t realize just what ‘collapse’ means this time around. Total.

twocats on Wed, 1st Mar 2017 11:34 am

In 2008 we had the GFC which was a huge civilization-al step-down (e.g reduced demand, deflated assets) at least for short-term. And now we have the Great Insitutional Crises (GIC) of 2016 with the advent of Trump and Co.

It’s not hard to imagine the GIC being equally disruptive to demand/consumption dynamics.

We had 9 relatively quiet years. Time for another whirl on the DeCivilizer Rollercoaster.

penury on Wed, 1st Mar 2017 11:37 am

Makati, it may sound rather rude of me to say, but to most U.S. residents total collapse is when their cell phone battery goes dead. People in the U.S. (except for the real poor((and they are never counted in U.S.))have never experienced poverty) or even real lack of services except in emergency situations where the government is expected to take care of them. Self reliance and planning are so lame and need to be discouraged by all means.

Jerome Purtzer on Wed, 1st Mar 2017 12:29 pm

The Donald has huge experience in taking businesses into bankruptcy. This will be his crowning achievement taking the U.S. and then the World into bankruptcy. As long as he can keep building his luxury resorts and golf courses, all will be well.